North Macedonia's central bank raised its key interest rate by 25 basis points to 4.25% (chart) on June 16, citing persistent inflationary pressures, heightened geopolitical uncertainty and strong domestic credit growth, it said.

The Executive Board of the National Bank of North Macedonia decided to increase the policy rate from 4.0% after assessing the latest economic and financial developments and their impact on the domestic economy.

The central bank said higher demand for foreign currency from the corporate sector since the beginning of the year had required greater intervention in the foreign exchange market, although demand has stabilised since early May.

It added that uncertainty linked to geopolitical tensions, particularly in the Middle East, continues to pose risks despite signs of easing.

Annual inflation slowed to 4.8% in May from 5.7% in April, mainly due to more moderate food price growth. However, the bank said inflation remains elevated, with increasing pressures from energy prices and core inflation pointing to continued upside risks.

The bank also noted that the domestic economy remains resilient. Real GDP expanded by 3.1% year-on-year in the first quarter, broadly in line with expectations, while foreign exchange reserves stood at €5.21bn at the end of May, remaining within the safe zone.

The central bank said deposit growth remains in line with projections, but credit expansion continues to exceed expectations, supporting domestic demand.

It added that the latest rate increase, together with earlier reserve requirement and macroprudential measures, is aimed at preserving the stability of the denar's exchange rate against the euro, anchoring inflation expectations and maintaining macroeconomic and financial stability.